Standard & Poor's, the credit ratings agency, has stripped Brussels' main bailout fund of its AAA status and challenged eurozone countries to increase their financial support for a collective rescue package or risk a further downgrade.

S&P said the loss of France's AAA rating had forced it to conclude that the European Financial Stability Facility should be cut to AA+ from AAA, which could increase its borrowing costs.

Germany and Finland, the remaining AAA-rated countries in the single currency, are expected to come under pressure to increase their commitments to bolster the EFSF's funds to prevent a further downgrade and the likelihood that lenders will demand higher interest costs.

The blow to the EFSF came as bankers poured cold water on hopes for an early deal between Greece and its creditors after they accused Athens of making "completely unreasonable" demands for debt payment cuts.

Charles Dallara, head of the Institute of International Finance which represents Greece's private creditors, said talks had yet to reach agreement on any aspect of a deal following demands from Greek negotiators for ultra-low interest rates on its outstanding debts.

The warning will send a shiver through Europe's capitals, which are pinning their hopes on a private sector deal with Greece to cap the country's ballooning debt bill and prevent contagion to other southern European nations.

As George Osborne admitted he could be forced to give billions of pounds in extra funds to the IMF to prevent Europe's debt crisis from spinning out of control, Dallara warned the Greek government that demanding a 4% interest rate meant some banks would be forced to write-off three quarters of their loans.

"That is essentially the area where the differences are substantial," Dallara said ahead of a rescheduled meeting on Wednesday. "They are looking at the private sector to accept interest rates that they would not accept [themselves], which is completely unreasonable."

Greece has accused hedge funds and banks of undermining a deal following a collapse in talks last Friday. Sources close to Athens said creditors were using brinkmanship to extract a high interest rate on outstanding debts to offset losses from a cut in the value of loans.

Banks have proved adept in the last couple of years in appearing to offer debt forgiveness while imposing a higher interest rate that allows them to recoup much of their losses.

However, bankers have insisted they need to drive a hard bargain following pressure to build up their reserves amid concerns of a recession this year and the potential for a repeat of 2008's credit crunch. Eurozone banks must find an extra £120bn to bolster their capital under rules imposed by Brussels.

Some analysts expect banks to need in excess of €120bn (£100bn) to satisfy international investors that they could remain solvent in a difficult economic period.

Danny Gabay, a former Bank of England economist, said that the bill for recapitalising European banks was far in excess of Brussels' estimate and nearer €1.8 trillion.

Gabay, who runs Fathom Consulting, said: "There is a way out if policymakers across Europe, and most notably those in Frankfurt, come to their senses and do what needs doing. Both they and we have long known that a wholesale recapitalisation of the European banking system is the necessary first step in resolving this crisis."

Gabay said the European Central Bank would also need to follow the Bank of England and US Federal Reserve by pumping cheap money into the financial system using quantitative easing (QE).

The ECB has proved reluctant to begin QE without firmer agreement among eurozone nations over which countries will pay the costs of bailing out indebted member states. It is also concerned to see closer fiscal co-operation to prevent cheap money being used to avoid implementing tough austerity measures.

Speaking to a German newspaper, ECB executive board member Jörg Asmussen warned that a new fiscal pact under discussion was being softened. Eurozone nations agreed before Christmas to fashion a closer union that would involve increased oversight of national budgets.

But Asmussen, who formerly worked for Germany's finance minister, said a draft agreement that allowed countries to loosen the spending rules in extraordinary circumstances amounted to a "substantial watering down".

Spain, Italy, Portugal, Greece and Ireland have become dependent on the ECB to lend funds as private investors shun European debt markets. Spain will test market appetite for its short-term debt on Tuesday for the first time since a downgrade by ratings agency Standard & Poor's last week. Analysts said it faces a far bigger hurdle on Thursday at an auction of bonds with maturities of up to 10 years.

Despite the two-notch cut by S&P, Spain is tipped to draw solid demand at both auctions, benefiting from support from banks flush with ECB cash and market perceptions the new government is serious about addressing the country's economic woes.